What does risk retention mean in the context of insurance?

• A. Choosing to insure a risk instead of denying coverage
• B. Transferring risk to another party
• C. Reducing the likelihood of a risk occurring
• D. Accepting the full liability of a potential loss

Answer: (A)

In the context of insurance, risk retention refers to the strategy where an individual or organization chooses to accept the potential financial consequences of a risk, rather than transferring that risk to an insurance company. This approach involves recognizing that they will bear certain costs or losses themselves, which may be incurred when a specific event occurs.

For instance, if a business decides to retain risk, it might choose to self-insure part of its liability rather than purchasing an insurance policy for that portion. By doing so, the entity is acknowledging that while insurance can mitigate potential losses, there are situations where it may be more cost-effective or practical to manage that risk internally.

The other options relate to different aspects of risk management but do not accurately define risk retention. For example, transferring risk to another party typically involves purchasing insurance, which is contrary to the principle of risk retention. Similarly, reducing the likelihood of a risk occurring pertains to risk mitigation efforts, and accepting full liability reflects a stronger commitment to bear all costs associated with potential losses, but not specifically in the context of choosing to insure or deny coverage.